Barclays said it has a 'neutral' view on the European clean energy sector, as it sees the sector is "key to addressing Europe’s energy trilemma" amid the backdrop of the energy crisis emerging from the Russian invasion of Ukraine and wider decarbonisation targets in Europe and elsewhere.
"Power prices are likely to remain elevated, but there are also short-term challenges such as cost inflation (both capital and material), permitting issues, logistics and regulatory risks," analysts said.
The key to share price performance in the next 12 months, in the analysts' view, is for companies to have "a portfolio setup, and a growth and pricing strategy, suited to their operational and financial resilience".
While the outlook appears positive, the analysts outlined the near-term challenges it saw as pertinent to the small and midcap renewables sector.
"These include increasing raw material costs, delays in permitting processes, logistical issues, increasing costs of debt and regulatory risks. Reflecting these headwinds, while we see power prices remaining elevated, we also expect continued volatility and uncertainty."
However, sector valuations have came down "meaningfully", it was noted, with an average ratio of enterprise valuation to earnings (EV/EBITDA) on a one-year forward basis of 12 times.
"Yet we still think the renewables sector will only offer selective value in the short term."